Musk refused to give up chairman role to settle SEC lawsuit, report says

Musk reportedly refused to sign a deal with the SEC because he felt by settling he would not be truthful to himself and he wouldn’t have been able to live with the idea that he agreed to accept a settlement and any blemish associated with that, CNBC reported Friday. Photo credit: REUTERS

UPDATED: 9/28/18 2:22 pm ET – adds details

Tesla Inc. CEO Elon Musk refused to pay a nominal fine and give up the role of chairman for two years as part of a settlement with the Securities and Exchange Commission, CNBC reported on Friday, citing sources.

The settlement would also require Tesla to appoint two new independent directors, the report said.

Musk reportedly refused to sign the deal as he felt by settling he would not be truthful to himself and he wouldn’t have been able to live with the idea that he agreed to accept a settlement and any blemish associated with that, the report said.

Sources, who requested anonymity because they were not authorized to discuss the matter publicly, told Reuters that while Musk was ready to go to trial he could still settle. They did not discuss possible terms.

Fox Business News also reported that Musk had been offered a temporary ban as CEO.

Musk has hired Stephen Best at Brown Rudnick, who successfully defended internet billionaire Mark Cuban in an insider trading case, according to people familiar with the plans who also asked not to be identified. He also hired former Assistant U.S. Attorney Chris Clark of Latham & Watkins to defend him in the case, the people said.

Tesla did not immediately respond to a request for comment. The SEC declined to comment on the settlement reports.

One person with knowledge of the SEC’s thinking said on Friday that the SEC lawsuit or a potential settlement did not preclude further action by the Justice Department.

The Justice Department declined to comment.

In previous fraud cases such as blood-testing firm Theranos, the Justice Department brought criminal charges three months after the SEC announced its settlement with the company’s founder, Elizabeth Holmes.

The Justice Department’s criminal probes typically take longer since the standard of proof is higher than the SEC’s civil cases, said legal experts.

“A lot of the time they do work together, but the DOJ’s investigation may go on longer. The SEC wouldn’t delay its case for the DOJ,” Teresa Goody, CEO of law firm Goody Counsel and a former SEC attorney.

The SEC on Thursday filed a lawsuit against Musk accusing him of fraud and sought to remove him from his role saying he made a series of “false and misleading” tweets about potentially taking the company private.

Shares of Tesla dropped 11 percent on Friday as Wall Street worried the lawsuit could force Musk to step down and make it difficult for the loss-making carmaker to raise more capital.

Several worried that the SEC action was also just the beginning of a legal battle with authorities, short sellers and other investors over Musk’s actions that could cost Tesla heavily.

“The SEC civil action may lead to Musk’s exit from Tesla (either permanently or temporarily) and the Musk premium in the shares dissipating,” Barclays analyst Brian Johnson said.

Musk, 47, is the public face of Tesla, and has driven it to the verge of profitability with a costly launch of the Model 3 sedan over the past year.

The Silicon Valley billionaire, who within three weeks of the tweets had abandoned the plan to delist Tesla, said overnight he had done nothing wrong and the company’s board reiterated its support for him.

“It will be too damaging to Tesla for him to be removed fully,” Fienseth said.

“In order for Tesla to raise money I think investors will want Musk to stay involved but have more controls in place.”